Question

List the main pros and cons of taking the import-replacing road to industrialization versus concentrating government aid and private energies on developing new manufacturing exports. Illustrate your answer with real world examples.

1. List pros and cons one by one
2. Give some real world example

Answer 1

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Note : Each paragraph is divided by pros and cons

Import-replacing or import substitution is a strategy that cannot be functional 100% in a nation at present. The world is so interconnected and globalisation means that the interdependency is vety difficult to bypass. There re countries like North Korea who have comparatively very low dependence and interaction with other countries. But even they have to rely on oteher countries for a lot of their products. Another big issues in implementing an import substitution policy is the price level. We often see that goods are imported due to the fact that they have lower price compared to domestic production. The consumers will always look to maximise their consumer surplus and hence will demand goods at a lower price. Thus the domestic industries cannot be set up as they have a huge capital cost initially which can only be offset after years of successful levels of production.

Import- replacing will certainly improve the balance of payment position of the country and stabilise the exchange rate and other macro eceonomic indicators. This will also generate a lot of employment for the domestic workforce which can be pivotal in improving output. For instance, recently we have seen US trying to restrict ALuminium imports which will definitely boost up the domestic aluminium sector

Whereas concentrating government aid and private energies on developing new manufacturing exports is more viable as long as the government can subsidise and incentivize these industries to start production. This also will generate a lot of employment and mobilise foreign investment which can be pivotal in achieving exponential growth rates.

However concentrating governmetn energies may create huge barriers for trade as we have seen with government enterprises like ARAMCO which are too big to compete against. This can result in a natural monopoly with sole control over prices. ALso, export driven growth may not necessarily provided the best goods to the domestic consumers as most of the good quality products are offered to the individuals abroad.